I'm a member of the Forbes wealth team, covering the world's richest people. I'm also the author of Forbes' first graphic novel, The Zen of Steve Jobs. Previously, I've written for the Chicago Tribune and The Times of South Africa. My alma mater is Northwestern University's Medill School, which has recently altered its name to include a rambling string of words that I cannot be bothered to remember. Follow @CalebMelby and/or circle me on Google+

John Schnatter wants to raise the cost of your pizza in response to new health care costs. And his math kind of adds up.

Updates can now be found at the bottom of this post.

Papa John Schnatter is no fan of Obamacare. The CEO of Papa John’s International has occasionally railed against the reform for months. Leading up to the election, he was a Mitt Romney supporter and fundraiser. Now that the election is over, he’s doubling down on his claim that the health care reform will force his company to increase pizza prices by 10-14 cents a pie. He estimates that Obamacare will end up costing his company $5-8 million annually.

The issue: the Affordable Care Act dictates that full-time employees (30 hours or more per week) at companies with more than 50 workers need to be provided health insurance. Schnatter has further claimed that some employers will cut employee hours to avoid providing them with healthcare.

Meanwhile, shares in Papa John’s International have been tumbling since last Thursday, falling from $51.70 at market close Wednesday to $49.22 on Monday, a 4.2% drop.

Checking Papa Schnatter’s Math

Last year, Papa John’s International captured $1.218 billion in revenue. Total operating expenses were $1.131 billion. So if Schnatter’s math is accurate (Obamacare will cost his company $5-8 million more annually), then new regulation translates into a .4% to .7% (yes, fractions of a percent) expense increase. It’s difficult to set that ratio against the proposed pie increase, given size and topping differentials, but many of their large specialty pizzas run for $16. Remarkably, a 10-14 cent increase on a $16 pizza falls in a comparable range: .6% to.9%. But the cost transference becomes less equitable if you’re looking at medium pizzas, which run closer to $12, meaning a .8% to 1.15% price increase.

For the sake of argument, let’s say that Papa John’s sells exactly half medium/half large specialty pizzas. Averaging the ranges for both sizes, then averaging that product yields a .86% price increase — well outside the range of what Schnatter says Obamacare will cost him.

So how much would prices go up, under these 50/50 conditions, if they were to fairly reflect the increased cost of doing business onset by Obamacare? Update 12/5/12: an earlier version of this story estimated that a fair per pie cost increase to reflect additional expenses due to Obamacare to be 3.4 to 4.6 cents a pie. That was incorrect. The range is 5.6-9.8 cents per pie. This is still absolutely outside the range of proposed pie increases suggested by Schnatter at the time, and, as discussed in the comments, the range gives Schnatter a large benefit-of-the-doubt margin as the estimate assumes all pizzas are sold at specialty prices. In reality, many pizzas sold are at discount or coupon prices, and many pizzas are not specialty pizzas, but in fact cheaper pizzas with fewer toppings. Thanks to Daniel Kirchheimer for noticing the error.

In September, the company announced that it would be giving away 2 million free pizzas. That was, of course, a promotion designed to increase brand awareness and to invite consumers to try the brand — with the ultimate goal of selling more pizzas. Those giveaways can’t really be cataloged alongside sales that would have been made otherwise. But just in case you’re curious, that would be the equivalent of $24 million to $32 million in pizza revenue.

Necks In This Game

Standing to lose (or gain) as his company determines how best to operate under new regulations is Papa Schnatter himself, who owns 6,094,409 shares, or nearly one fourth, of Papa John’s, according to the company’s most recent annual report. 1,268,052 of those shares are held in a family limited partnership and 84,000 shares held in a 501(c)(3). The rest are directly owned. At the $49.44 share price, subtracting those held in a charitable trust, the remaining 6,010,409 shares are worth roughly $297 million. Schnatter’s compensation packages for years 2009-11 were $2,319,643, $2,614,516, and $2,745,219 respectively, also according to the annual report. Papa John’s International has not paid a dividend since 2005.

Also hanging in the balance are the shares of institutional investors FMR (11.6%), BlackRock (6.7%) and JP Morgan Chase (5%). But if these notions of protest materialize, Papa John’s front line will be populated by the franchise owners who operate many of its 4,000-plus international locations.

Emails sent to Papa John’s Investor Relations and calls placed to Papa John’s Public Relations were not immediately returned for comment.

Updates as of 9:15 p.m. EST.

1. First of all, I’m really enjoying the spirited conversation on this post.

2. With regard to the pizza giveaways. These are not “lost revenue.” They are a marketing tactic designed by the company to bring more consumers to Papa John’s, with the end goal of selling more pizzas and generating more revenue. It is a strategic investment. Further, the cost of giving away a pizza is not equal to the market value of that pizza. I apologize if that was not made clear above.

3. Some seem to think my analysis suggests I don’t appreciate a business’s duty to shareholders to maximize value. That is not in dispute. But (given the parameters I set up), using Schnatter’s figures, the costs his company will incur due to Obamacare are not equal to the pie increases he mentions. Those pie increases would more than make up for damage done to the company’s net income through increases to operational expenses. Of course, if he thinks it won’t harm the bottom line, he is absolutely allowed to increase prices further. Given inflation and expansion, his other expenses will obviously increase in the following years too. But attributing all price increases to Obamacare would be disingenuous.

5. Finally, I get the impression that Schnatter is attempting to communicate that there is no such thing as a free lunch, which is true. In the comments, many have mentioned that other companies will most likely need to increase prices in response to Obamacare. That is also true. The question that can’t be answered right now is: How will Schnatter’s open communication and politicization of price increases ultimately impact his company? Variables to consider: boycotts, counter-boycotts and shareholder perceptions of all the above. Previous case study: Chik-Fil-A.

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Comments

Your JOKING right?? The man is complaining about 3.4pennies on each pizza that WE the consumer are paying him?? They just gave away $24-$34MILLION $$$ in free pizza, why wasn’t he complaining about that?? If the price of pizza sauce went up, would Papa John FIRE employees to make up the cost, NO he would adjust the cost of the pizza quietly and we would pay for it.(Business 101) BUT this is a SORE LOSER who still can’t come to grips with the fact that all his $$$donations could not get him a president!!!! Bet he regret that investment.

Ha, another “stop advertising” comment. They are everywhere these days. This type of illogical comment just screams “I’ve never run a business”. Ya, cut back on advertising, that will make sales soar. Then he’ll have to layoff thousands.

blah, blah, blah, stop presuming lindsey not all resturants have a small profit margin…oh but then of course you’ve probably checked them all! The cheap bum doesn’t want to take care of the people who work to get his profits where they are wich are enough to afford him a castle!! Are you #$$%@@ serious, food costs! If a person can’t see past their greedy self to the welfare of those who helped him get where he is, THEN GET OUT OF THE BUSINESS, ya bum! No more Papa John’s for me!

Clearly you are confused as to what a balance sheet is. Hint: it “balances” assets, liabilities and owner’s equity, not revenue and expenses. Look to the income statement for that.

Something to consider… Papa John’s major competitors are going to be impacted by the same employer mandate he is. What makes you think they won’t both raise prices by a few cents to cover the cost of health insurance? So from PJ’s perspective it’s a wash. But from the employee’s perspective, they get health insurance.

Feel ya, but that means you’re foregoing a very valuable pre-tax benefit to gain the peace of mind which ObamaCare is going to give you by law anyway (no discrimination on the basis of pre-existing conditions).

Another author with zero business acumen ? Perhaps easier to sit on sidelines and throw mud, then get off backside and create business ?

Caleb how many employees do you employ ? How many payrolls have you made ?

Is it summed up in this perhaps Misleading statement by author ?

” Papa John’s International have been tumbling since last Thursday, falling from $51.70 at market close Wednesday to $49.22 ”

“ tumbling”

The 52 week low is 35.21 it is Not Anywhere near there. It was below 40 a few months ago May 2012. In 2010 it was at 25 and change. It was below $ 15. in 2009. Below $ 15 in 2009 and above $ 45 in 2012 – not bad – a triple not a tumble.

Caution advised, the authors entire article has similar “excitable” statements.

Lets face facts, when seeing the true results of the health care:

1. For the individual – There is no incentive to buy health insurance. If you have a $ 2,000 penalty and they will take pre-existing conditions, why on earth would anyone pay $ 5,000, $ 8,000 or a typical family premium of $ 15,000 a year.

Fact. Sooner or later all premiums will rise as more and more people find they are better to accept the penalty then pay a premium in a down economy.

2. For the corporation – There is no incentive to hire full time employee. Why not hire two (2) part time each working 25 hours a week. a) cheaper labor b) at will employee c) fewer benefits no health care

Fact: Sooner or later companies will realize two part time workers are better than 1 full time, and while a bit aggravating at first scheduling will be done and it will save money.

We have already done it where I work. 2 full time positions gone. Covered by One part timer and two floaters from other departments that come over when not busy.